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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended July 31, 1998
Commission File Number 0-15284
J2 COMMUNICATIONS
(Exact name of registrant as specified in charter)
California 95-4053296
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10850 Wilshire Boulevard, Suite 1000
Los Angeles, California
(Address of principal executive office)
Registrant's telephone number, including area code
(310) 474-5252
Securities registered pursuant to Section 12(g) of the Act:
(Title of each class) (Name of each exchange
on which registered)
Common Stock, no par value NASDAQ
Series A Warrants NASDAQ
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of October 26, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,301,000.
As of October 26, 1998, the Registrant had 1,200,000 of its common stock
("Common Stock"), no par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into Parts I, II or III
PART I
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
Certain statements in the Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements, expressed or implied by such forward-looking statements.
ITEM 1: THE BUSINESS
The Company was founded in March, 1986 by its Chairman of the Board and
President, James P. Jimirro, the first President of both the Disney Channel
and Walt Disney Home Video. The Company was originally formed primarily to
engage in the acquisition, development and production of entertainment feature
film and special-interest videocassette programs, and the marketing of these
programs in the home video sell-through market. In 1990, the Company acquired
National Lampoon, Inc., a publisher of a national satire and humor magazine
and licensor of feature films. As more fully described below, in an effort to
preserve capital the Company has significantly scaled back its operations, and
now monitors a modest staff to administer the licensing of the National Lampoon
name. The Company is not actually engaged in any production or development
activity and instead monitors various license agents relative to this trademark.
Due to the increasing competitiveness of the videocassette market, resulting
in declining volume and profitability, the Company has de-emphasized this
segment of its business. The Company expects that its videocassette business,
which has been declining in recent years, will continue to decline, and in the
future will not be a significant part of its operations. The Company is now
focusing on using the National Lampoon name in virtually every segment of the
entertainment business. The first significant result of this effort was
realized with the release in February, 1993 of the feature film "National
Lampoon's Loaded Weapon I". This film achieved in excess of $28 million of
theatrical revenue in its United States theatrical release. The Company is
participating in the film's revenue as provided by the Company's licensing
agreement with New Line Cinema, the producer and distributor of the film. The
second picture under this licensed agreement, "National Lampoon's Senior
Trip," was released in September of 1995. The theatrical revenue from this
film was disappointing. However, as the Company only licensed the "National
Lampoon" name with respect to the project, it had no risk of loss if theatrical
box-office and ancillary revenues were disappointing. The Company intends to
continue its efforts to license the "National Lampoon" name to other producers
of full-length motion pictures. In fiscal 1994, a licensing agreement was
entered into with Showtime Networks, Inc. which provided for the production
of seven (7) movies made for initial viewing on the Showtime television channel
over three (3) years. The Showtime Agreement expired during the fiscal year
ending July 31, 1997 with only four made-for-cable pictures being produced and
as such, the fifth through seventh movies were not produced. In accordance
with the contract, Showtime has paid the producer fees due for the fifth (5)
through seventh (7) movies as of July 31, 1998.
On April 15, 1998 the Company entered into an agreement with International
Family Entertainment, Inc. ("IFE"), a wholly-owned subsidiary of Fox Kids
Worldwide, Inc., whereby IFE entered into an exclusive option, which option was
exercised on June 10, to acquire certain exclusive rights in and to the
"National Lampoon" brand (including name, logos, and related elements).
On June 10, 1998 IFE elected to exercise that option. The rights acquired by
IFE consist of the right to use the National Lampoon name in connection with a
Monday through Friday half-hour comedy strip, a once-weekly movie and /or
comedy night as well as in connection with original made-for-television movies
and series. The first two projects resulting from this alliance are two made-
for-television motion pictures entitled "National Lampoon's Men in White" and
"National Lampoon's Golf Punks". These two movies were broadcast on Fox Family
Channel during the months of August and September of 1998 to favorable
ratings. In addition, IFE's exercise of the option entitles them to four (4)
additional, consecutive, conditional annual options to renew and extend this
agreement through August 2003.
RECENT DEVELOPMENTS AND MATERIAL INFORMATION
1. Dependence on National Lampoon
In October 1990, J2 Communications ("J2" or the "Company") acquired all
of the outstanding stock of National Lampoon, Inc. ("NLI"), the publisher of
the National Lampoon magazine and a developer of other film programming.
On April 15, 1998 the Company entered into an agreement with International
Family Entertainment, Inc. ("IFE"), a wholly owned subsidiary of Fox Kids
Worldwide, Inc. The Company will receive a guaranteed annual fee for each
broadcast season with annual increases for each subsequent option renewal. In
addition to the guaranteed fees, the Company will receive contingent
participation in revenues generated from the exploitation of original
programming, in all media including domestic home video, network, foreign
distribution and worldwide interactive/multimedia. The Company is a profit
participant in these ventures and is substantially dependent on the
performance of third parties to such agreements and upon the commercial
success of the licensed products.
2. Management Contract of the Magazine
In August 1993, the Company entered into an agreement with CR Cooper
Publications, Inc., a magazine publisher, to print and distribute the
magazine. Editorial control of the magazine content remained with the
Company. The agreement called for the publication of a minimum of 4 issues
during the first year of the agreement, 6 issues the second year and 10 issues
for the third and subsequent years. The agreement was for a period of 3
years. In February 1996, the agreement was terminated by the Company because
certain minimum performance targets were not met by the Publisher. Beginning
with the 25th anniversary issue published in May 1996, the Company again began
publishing the magazine. The Company's current agreement with Harvard Lampoon
obligates the Company to publish at least one issue of the magazine a year
with a minimum of 50,000 copies. The Company is complying with this
obligation, but has not determined when and if it would publish more than the
minimum requirement. The Company received a waiver from the Harvard Lampoon
from its obligation to publish the magazine during the current fiscal year,
but has subsequently published an issue of the magazine in October 1998.
3. Dependence on Key Personnel
The Company is substantially dependent on the services of James P.
Jimirro, who serves as the Company's Chairman of the Board and President.
Although Mr. Jimirro is party to an employment agreement with the Company, the
loss of his services could have a material adverse effect on the Company.
NATIONAL LAMPOON OPERATIONS
NLI and its subsidiaries were acquired by J2 effective October 24, 1990 upon
approval of the shareholders of both companies. NL is engaged in various
aspects of the entertainment business. It is the publisher of National
Lampoon, a magazine of contemporary humor and satire. NL also creates,
develops, and has produced (but does not finance) the production of motion
pictures, television programs, and other entertainment media. This division,
together with the prior NLI entity, is collectively referred to as "NL."
Motion Pictures, Television and Other Entertainment Activities
Motion Pictures: NL's motion picture activities have consisted principally of
developing ideas for feature films, suggesting script writers, providing
supervision of the scripting, and providing producer services in connection
with the production of such films. NL has not financed the development,
production or distribution of movies, and does not maintain a development
department. Instead, NL is typically presented with film ideas by major movie
studios for consideration with regard to financing of development, production,
and distribution by such studios and obtaining the right to use the "National
Lampoon" name. For these services, NL receives production and other fees and
a participation in the profits, if any, of the movie which bears its name.
After NL's first movie, "Animal House," NL's compensation arrangements for its
comedy film projects financed and distributed by studios traditionally fell
into a general pattern of cash fees for NL's producer services and for the use
of the name "National Lampoon" in the film title, and a small percentage of
the studio's "net profits" (after a certain level of revenues has been
achieved) from the film.
To date, NL has been involved in the production of eight feature films,
including the highly profitable 1978 film "Animal House," co-produced by NL
and Ivan Reitman. This movie starred John Belushi and was financed and
distributed by Universal Studios. For the last five years, revenues from this
picture have consisted mainly of NL's share of fees derived from the licensing
of the picture by Universal for showing by various independent television
stations, and from the sale of videocassettes.
NL's other films have included "National Lampoon's Vacation" (released in
1983) and its sequels, "National Lampoon's European Vacation" (released in
1985), and "National Lampoon's Christmas Vacation" (released in 1989), all
starring Chevy Chase and Beverly D'Angelo.
NL and New Line Cinema Corporation ("New Line") entered into an agreement,
dated as of September 11, 1991, regarding the development and production,
financing, and distribution of up to three (3) National Lampoon motion
pictures each at budgets not greater than $10 million within four and one-half
years of execution of the agreement (the "New Line Agreement"). The New Line
Agreement provided NL with an advance fee for the use of the "National
Lampoon" name in connection with each of the theatrical motion pictures to be
produced and additional contingent compensation based on the gross revenues
produced by the picture.
New Line released the first film under this agreement, "National Lampoon's
Loaded Weapon I," in February 1993. The film grossed in excess of $28 million
at the domestic box-office. The second film, "National Lampoon's Senior Trip"
was released in September, 1995 and was not a box office success. The New
Line agreement expired on May 10, 1996, and as such, the third motion picture
was never produced.
In March, 1994, the Company signed an agreement with Showtime Networks, Inc.
("Showtime") to produce seven (7) movies over a three (3) year period to be
aired initially on the Showtime Network or The Movie Channel. The agreement
provides for the payment of a license fee to National Lampoon upon the
commencement of principal photography of each film and contingent compensation
based on revenues the films may generate from all sources. The Showtime
agreement has now expired, with only four (4) made-for-cable movies produced,
and as such, the fifth through seventh movies will not be produced. In
accordance with the contract, Showtime has paid the producer fees due for
the fifth (5) through seventh (7) movies as of July 31, 1998. Unless the
Company licenses the rights and obtains a significant advance, revenue from
theatrical feature film rights for fiscal year ended July 31, 1999 will be
dependent on contingent compensation from previously licensed rights. The
results will be lower feature film rights revenues for the fiscal year ended
July 31,1999, than in prior years.
Television: In July 1987 NL entered into an exclusive television agreement
with Barris Industries, Inc. ("Barris"), a Los Angeles-based television
production company. Barris is a predecessor of Guber-Peter Entertainment
Company ("GPEC"), which was acquired by Sony Pictures (formerly Columbia
Studios). Pursuant to the Barris Agreement, NL granted Barris the exclusive
right to produce television programming of any kind utilizing the name
"National Lampoon" for a term of five years. NL had not previously been
significantly active in creating television programming, and this agreement
did not produce any significant television activity.
Concurrent with the acquisition of NL by J2 Communications, the exclusive
right to produce television programming under the name "National Lampoon" was
re-acquired by NL on October 1, 1990 from GPEC ("GPEC Agreement"). The
purpose of this acquisition of rights was to ensure that NL had the ability to
control the use of its name in the valuable medium of television and to
develop comedy motion picture and other programs for broadcast in all areas of
television distribution including network, syndication and cable.
The GPEC Agreement required the re-payment of $1,000,000 to GPEC, which was
the consideration paid by GPEC to NL for the rights in 1987. This sum was
payable by NL, fifty-percent ($500,000) on execution of the contract (and so
paid), and fifty-percent ($500,000) payable out of seventeen and one-half
percent (17 1/2%) of the gross receipts received by NL as a result of the
exploitation of any new television programs bearing the National Lampoon name,
with certain minimums due on commencement of principal photography or taping
of the applicable programs. After this amount has been re-paid, NL shall have
no further obligations to GPEC with respect to television. To date, $131,000
has been paid under the gross receipt provision of the agreement.
On April 15, 1998, the Company entered into an agreement with International
Family Entertainment, Inc. ("IFE"), a wholly-owned subsidiary of Fox Kids
Worldwide, Inc., whereby IFE entered into an exclusive option to acquire
certain exclusive rights in and to the "National Lampoon" brand (including name,
logo, and related elements). On June 10, 1998 IFE elected to exercise that
option. The rights acquired by IFE consist of the right to use the National
Lampoon name in connection with a Monday through Friday half-hour comedy
strip, a once-weekly movie and/or comedy right as well as in connection with
original made-for-television movies and series. The first two pictures
resulting from this alliance are two made-for-television motion pictures
entitled "National Lampoon's Men In White" and "National Lampoon's Golf Punks".
These two movies were broadcast on Fox Family Channel during the months of
August and September of 1998 to exceptional ratings. In addition, IFE's
exercise of the option entitles them to four (4) additional, consecutive,
conditional annual options to renew and extend this agreement through August
2003.
Made-For-Video Movies
"National Lampoon's Last Resort", a made-for-video movie produced by Rose &
Ruby Productions, completed filming in July, 1993. The picture stars Corey
Feldman & Corey Haim, and was distributed internationally by Moonstone
Entertainment and in the U. S. by Vidmark in early 1994.
Motion Picture and Television Competition: Motion pictures and television
development activities are highly competitive. NL is in competition with the
major film studios as well as numerous independent motion picture and
television production companies for the acquisition of literary properties,
the services of creative and technical personnel, and available production
financing. NL believes it has been, and will continue to be, aided in these
endeavors by the recognition achieved by the "National Lampoon" name and by
the success achieved by its films, "National Lampoon's Animal House,"
"National Lampoon's Vacation," and "National Lampoon Loaded Weapon I;"
however, NL cannot guarantee that any project will actually be produced or if
produced, will yield the success of past projects.
Other Activities
Internet: The company is in the early planning stages of creating it's own
National Lampoon web site on the WorldWide Web. The site would be developed
into a multilayered site featuring past comedy as well as current comedy
content. It would also feature National Lampoon merchandise and past issues of
the National Lampoon magazine issues for sale as well as other comedy
merchandise. The site would be located at Nationallampoon.Com. on the
Worldwide Web.
Books: NL continues the publication of various books, including "National
Lampoon's Treasury of Humor" with Simon and Schuster, and four "True Facts"
books with Contemporary Books. Other NL books published include the third
edition of "National Lampoon's Cartoon Book," and "National Lampoon White
Bread Snaps".
Computer Games: "National Lampoon's Chess Meister 5 Billion and 1," a
computer game produced by Spectrum HoloByte, is currently available
nationwide. Also available is "The Personal Daily PlanIt", a daily planner
featuring National Lampoon's Joke of the Day, distributed by Media Vision. In
1995, Trimark Interactive developed and distributed the CD-ROM title "National
Lampoon's Blind Date." Other interactive titles being developed by National
Lampoon include "National Lampoon Goes To Hell" and "National Lampoon I Can't
Believe It's Not A Game Show".
NL has a number of merchandising arrangements, including a line of trading and
post cards based upon National Lampoon magazine art. In addition, NL has
concluded a deal with At A Glance Landmark, which published the Company's 1998
calendar, to distribute the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND
HORRORSCOPE.
Recordings: Rhino Records continues to distribute a commemorative box set
titled "The Best of The National Lampoon Radio Hour," a compilation of classic
comedy from the 1970's show.
Publishing Operations
National Lampoon Magazine: First published in March 1970, National Lampoon is
distributed at newsstands, bookstores, and other retail outlets. Its audience
is largely young, college educated, and affluent. Each issue of the magazine
contains original articles, artwork, and photographs treating various matters
in a satirical manner.
National Lampoon became a bi-monthly magazine in late 1986 with a $3.95 cover
price with approximately 112 pages per issue. Commencing with the March 1991
issue, National Lampoon increased to a ten (10) times per year frequency and
also reduced its cover price to $2.95 and lowered the page count to 84 pages.
However, the continued economic recession and the advent of the Gulf War
depressed all magazine circulation and related advertising revenues.
Consequently, beginning with the December 1991 issue, the Company reverted to
bi-monthly issues. In an effort to reverse the trend of NL losses over many
years, in March 1992, the Company relocated the principal offices of National
Lampoon, Inc. to Los Angeles, California, and closed the New York offices.
After the April 1992 issue, NL suspended publication of National Lampoon for
several months. NL recommenced publication of National Lampoon with the
spring 1993 issue.
In August 1993 the Company entered into an agreement with CR Cooper
Publications, Inc., a magazine publisher, to print and distribute the
magazine. Editorial control of the magazine content remained with the
Company. The agreement called for the publication of a minimum of 4 issues
during the first year of the agreement, 6 issues the second year and 10 issues
for the third and subsequent years. The agreement was for a period of 3
years; however in February 1996, the agreement was terminated by the Company
because certain minimum performance targets were not met by the Publisher.
Beginning with the 25th anniversary issue published in May 1996, the Company
again began publishing the magazine. The Company published 55,000 copies of
the 25th Anniversary 1996 issue and 62,000 copies of the 1997 issue. The
Company's current agreement with Harvard Lampoon obligates the Company to
publish at least one issue of the magazine a year with a minimum of 50,000
copies. The Company is complying with this obligation, but has not determined
when and if it would publish more than the minimum requirement. The Company
received a waiver from the Harvard Lampoon from its obligation to publish the
magazine during the current fiscal year, but has subsequently published an
issue of the magazine in October 1998. The Company published 53,000 copies
of the magazine with a cover price of $4.95.
An agreement between NL and The Harvard Lampoon, Inc. provides that NL may use
the "Lampoon" name perpetually, subject to, among other things, publication of
the magazine at least once a year. Under the agreement, as amended, NL pays
The Harvard Lampoon, Inc. royalties of up to 2% of all revenues derived from
sales of publications using the name "National Lampoon," and royalties of up
to 2% of "pre-tax profits" (as defined in the agreement) derived from non-
publishing activities using such name. Except for this royalty arrangement,
there is no connection between National Lampoon and The Harvard Lampoon. The
name "National Lampoon" is a registered trademark of the Company.
Competition in Publishing: The magazine publishing industry is intensely
competitive with respect to both readership and advertising. National Lampoon
is one of the few nationally circulated magazines directed to an adult
audience devoted exclusively to contemporary humor and satire. There are,
however, a number of nationally distributed magazines devoted to contemporary
subjects and events, some of which contain material similar to that contained
in National Lampoon.
VIDEO OPERATIONS
The Company, which through 1993 was engaged in significant operations in the
sell-through video market, has drastically diminished its video operations.
The Company was currently engaged in the exploitation of "Dorf on Golf", the
rights to which expired this year. After such time, the Company does not
expect that its video operations will generate any significant revenue.
EMPLOYEES
As of October 23, 1998, the Company employed four (4) employees of whom two
(2) are full time and two (2) are part-time.
ITEM 2: PROPERTIES
The Company leases office space of approximately 3,912 square feet at 10850
Wilshire Boulevard, Suite 1000, Los Angeles, California 90024 for a five (5)
year period commencing on October 1, 1995. The Company's rental obligation is
$6,454 per month. The space is utilized for office space, as well as storage
of video masters, cassettes and back issues of the National Lampoon Magazine
and other NL archival materials. In addition, it provides storage for legal,
accounting and contract files related to past years for National Lampoon and
J2 Communications. Management considers the Company's corporate offices
generally suitable and adequate for their intended purposes.
ITEM 3: LEGAL PROCEEDINGS
The Company, NLI and the officers and directors of NLI became the defendants
in a lawsuit filed in 1990 in the Superior Court of the Southern District of
New York in regard to the acquisition of NLI by the Company. The shareholders
of NLI (the "Plaintiffs") filed the claim with respect to the tax treatment of
the transaction with respect to the individual shareholders of NLI. The
Company entered into a settlement agreement in August 1991, which must still
be approved by the courts, under which the Company will issue an addition
41,667 shares of its common stock to the Plaintiffs and provide for the
payment of attorneys' fees. The Company has had no contact with the Plaintiff's
or its attorneys since 1991. The value of the shares to be issued is
presented as a liability of $203,000 as of July 31, 1998, and 1997, as the
shares have not yet been issued and the settlement has not been approved.
On March 10, 1997 counsel for Harvard Lampoon, Inc. ("HLI") filed a demand for
arbitration to the American Arbitration Association, asserting that the
Company underpaid royalties under the HLI royalty agreement by approximately
$226,000, plus unspecified late charges, for the period from July 1, 1992,
through June 30, 1995, based on HLI's interpretation of the agreement. By
agreement of both parties arbitration was stayed in order to a mediation under
the auspices of the Judicial Arbitration and Mediation Services, which took
place on May 8th and 9th, 1997. Settlement negotiations commenced at the
mediation and arbitration proceedings continue to be stayed while settlement
negotiations proceed. If settlement is not reached, J2 will vigorously
contest HLI's claims in arbitration.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
a. Stock: The Company's Common Stock has been traded in the over-the-
counter market since October 2, 1986 under the symbol JTWO. On October 21,
1998, the Company held a special shareholders meeting where a 3:1 reverse
stock split was voted on and approved. In consideration of this subsequent
event, all periods presented have been restated to retroactively reflect the
decreased number of shares and share prices outstanding. The reverse split
resulted in a decrease in the common shares from 3,600,000 to 1,200,000 for
all periods presented. The following table sets forth for the periods shown,
the high and low sales prices of the common stock during each quarterly period
within the two most recent fiscal years, as reported by NASDAQ.
Common Stock
High Low
Fiscal 1999:
First Quarter (Through October 23, 1998) 2 11/32 1 5/16
Fiscal 1998:
First Quarter 4 19/32 2 5/8
Second Quarter 3 3/4 1 25/32
Third Quarter 1 13/16 1 1/2
Fourth Quarter 3 9/32 2 1/16
Fiscal 1997:
First Quarter 4 1/8 3 3/16
Second Quarter 3 3/4 2 5/8
Third Quarter 3 3/32 2 11/32
Fourth Quarter 3 21/32 2 5/8
On October 23, 1998, the closing sales price for the Common Stock was 1 5/16
per share. The approximate number of holders of record of Common Stock on
that date was 551. The Company has never paid a dividend on its Common Stock
and presently intends to retain all earnings for use in its business.
b. Warrants: The Company's Warrants were issued in connection with its
acquisition of National Lampoon, Inc. The warrants began trading in the over-
the-counter market on October 26, 1990 under the symbol JTWOW.
The Company decided not to extend the exercise period for its warrants,
which expired pursuant to their terms on June 30, 1998.
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
July 31, 1996, July 31, 1997 and 1998 and the consolidated balance sheet data
at July 31, 1997 and 1998 are derived from the Company's consolidated
financial statements included elsewhere in this Annual Report that have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report, which is also included elsewhere in this Annual Report. Such
selected consolidated financial data should be read in conjunction with those
consolidated financial statements and the notes thereto. The selected
consolidated income statement data for the years ended July 31, 1994 and 1995
are derived from audited consolidated financial statements of the Company
which are not included herein.
Selected Consolidated Financial Data
Years ended July 31,
1998 1997 1996 1995 1994
STATEMENT OF OPERATIONS DATA:
Total revenues $ 868,000 $ 1,415,000 $ 1,041,000 $1,333,000 $ 1,863,000
Costs and expenses:
Costs of revenue 45,000 262,000 259,000 193,000 203,000
Selling, general
and administrative 765,000 792,000 725,000 818,000 1,129,000
Amortization of intangible assets 240,000 240,000 240,000 240,000 240,000
Income (loss) from operations (182,000) 121,000 (183,000) 82,000 291,000
Other income and expense:
Settlement of royalty and other
claims 343,000 - - - 84,000
Minority Interest in income
of consolidated subsidiary (34,000) (82,000) (46,000) (30,000) (30,000)
Interest expense - - - - (18,000)
Income (loss) before provision for
(benefit from) income taxes 127,000 39,000 (229,000) 52,000 327,000
Provision for (benefit from)
income taxes 6,000 9,000 7,000 (14,000) 22,000
NET INCOME (LOSS) $ 121,000 $ 30,000 $ (236,000) $ 66,000 $ 305,000
INCOME (LOSS) PER COMMON SHARE
Basic $ 0.10 $ 0.03 $ (0.20) $ 0,06 $ 0.25
Diluted $ 0.10 $ 0.02 $ (0.20) $ 0.06 $ 0.25
Years ended July 31,
1998 1997 1996 1995 1994
BALANCE SHEET DATA:
Intangible assets $3,656,000 $3,896,000 $4,136,000 $4,376,000 $4,616,000
Total assets $5,962,000 $5,473,000 $5,367,000 $5,667,000 $5,801,000
Shareholders' equity $3,803,000 $3,682,000 $3,652,000 $3,888,000 $3,814,000
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1998 VERSUS JULY 31, 1997
Total revenues for 1998 decreased $547,000 to $868,000 compared to $1,415,000
for 1997. Movies, television and theatrical revenues decreased $348,000
primarily due to decreased movie licensing revenue of previously licensed
movies. Videocassette sales decreased $218,000 to $1,000 from $219,000 from
the prior year due to the Company continuing de-emphasizing the video segment
of its business because of declining profitability. Royalty income increased
$49,000 from $111,000 to $160,000 from the prior year, primarily due to the
recognition of income on the balance of advance license fees upon expiration
of the license agreements. Publishing revenue decreased $56,000 from last
fiscal year to zero this year due to the Company receiving a waiver from
publishing the "National Lampoon" magazine during the current fiscal year.
Interest income for the year increased $26,000 to $85,000 from $59,000 in the
prior fiscal year primarily due to increased interest income recognized on
short-term investments, as well as higher cash balances invested
in interest bearing accounts during the current fiscal year.
Cost of movies and television decreased $27,000 to $26,000 from $53,000 in the
prior fiscal year, primarily due to no payments being required on the "GPEC"
rights agreement.
There was no cost of magazine due to the company obtaining a waiver from
publishing a magazine this fiscal year.
Royalty expenses decreased $49,000 to $14,000 compared to $63,000 in 1997,
primarily due to no royalty expense being due on the balance of advance
license fees upon expiration of the license agreements as mentioned above.
Selling, general and administrative expenses decreased $27,000 to $765,000 in
the current year as compared to $792,000 in the prior year. The decrease was
primarily due to a reduction in salary expense and insurance expense,
partially offset by an increase in accounting and corporate expenses.
Other income of $343,000 primarily represents the reversal of previous
accruals related to potential royalties, which were extinguished at a reduced
amount, the current year recognition of certain unearned revenues and the
settlement of certain accrued expenses at reduced levels.
Net income for the current year was $121,000, equal to $.10 per diluted share
compared to $30,000, equal to $.02 per diluted share in the prior fiscal year.
The increase in net income was due primarily to an increase in royalty,
interest and other income, lower general and administrative expenses and cost
of movies and television. This was partially offset by lower movies,
television and theatrical revenue and reduced videocassette sales.
YEAR ENDED JULY 31, 1997 VERSUS JULY 31, 1996
Total revenues for 1997 increased $374,000 to $1,415,000 compared to
$1,041,000 for 1996. Movies, television and theatrical revenues increased
$431,000 primarily due to increased movie licensing revenue of previously
licensed movies and payment of the license fees for two Showtime movies during
fiscal year 1997. Videocassette sales decreased $92,000 to $219,000 from
$311,000 from the prior year due to the company de-emphasizing the video
segment of its business because of declining profitability. Royalty income
increased $5,000 to $111,000 from $106,000 from the prior year, primarily due
to increased revenue received from a newly licensed distributor. Publishing
revenue increased $48,000 to $56,000 from $8,000 in the prior year due to a
majority of revenue for the 25th anniversary issue of the National Lampoon
magazine, which went on sale late in fiscal 1996, being recorded in fiscal
1997, along with the fiscal 1997 magazine issue. Interest income for the year
decreased $18,000 to $59,000 from $77,000 in the prior fiscal year primarily
due to a decrease in yields on short-term investment, as well as a reduction
in the average short-term investment balance during 1997.
Cost of videocassettes sold as a percentage of sales increased to 48% in
fiscal 1997 compared to 45% in 1996, primarily due to reductions in the sales
price of certain videos as they are in the latter stages of their release
pattern.
Costs of movies and television expenses increased $27,000 to $53,000 from
$26,000 in the prior fiscal year, due primarily to additional payments
required to be made on increased television revenue on the "GPEC" rights
agreement.
Magazine editorial, production and distribution expense decreased $11,000 to
$41,000 from $55,000 due primarily to last fiscal year's expense having
included costs associated with prior editions of the magazine.
Royalty expenses increased $26,000 to $63,000 compared to $37,000 in 1996,
primarily due to an increase in royalty income.
Selling, general and administrative expenses increased $67,000 to $792,000 in
the current year as compared with $725,000 in the prior year. The increase
was primarily due to an increase in salary expense, partially offset by a
reduction in legal and accounting expenses.
Net income for the current year was $30,000, equal to $0.02 per diluted share
compared with a net loss of $236,000, equal to $0.20 per diluted share. The
increase in net income was due primarily to increase television and theatrical
revenues, which were partially offset by a reduction in video sales.
Liquidity and Capital Resources
Cash and short term investments at July 31, 1998 totaled $2,231,000, an
increase of $729,000 from the prior year-end.
The Company has no current plans for any significant capital expenditures in
its current line of business and believes that its present level of cash and
cash equivalents, augmented by internally generated funds, will provide
sufficient cash resources through fiscal 1999.
The Company has made a significant investment in the "National Lampoon" name
and other intangible assets through its acquisition of NLI. Realization of
these acquired assets ($3,656,000 at July 31, 1998) is dependent on the
continued licensing of the "National Lampoon" name for use in feature films,
video, television and audio distribution and merchandising of other
appropriate opportunities. The Company has received approximately $6,223,000
in licensing revenues since the acquisition of the "National Lampoon" name in
1990. The Company is in the process of negotiating other licensing agreements
and the development of other concepts, programs, etc. that could generate
additional licensing fees in the future. If these and other licensing
agreements that the Company may enter into in the future do not result in
sufficient revenues to recover these acquired intangible assets over a
reasonable period of time, the Company's future results of operations may be
adversely affected by a write-off of or an adjustment to these acquired
intangible assets.
In evaluating if there has been an impairment in the value of its long-lived
assets, the Company follows the guidelines of SFAS No. 121. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. Management has determined that through the realization of
future licensing agreements, expected future cash flows relating to the
intangible assets will result in the recovery of the carrying amount of such
assets.
Year 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The company has recently purchased a new
computer and software system from Dell Computer, which should be fully
integrated by the end of the current fiscal year. The year 2000 problem is the
result of computer programs being written using two digits (rather than four)
to define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculation or system failures.
Based on preliminary information, costs of addressing potential problems are
currently not expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
Subsequent Events
On August 13, 1998 the Company was notified by NASDAQ that the Company's
security was not in compliance with the new minimum bid price requirement,
pursuant to NASD Marketplace Rule 431 (c) (04), which became effective
February 23, 1998. As a result, the Company will be provided 90 calendar days,
which expires November 13, 1998, in order to regain compliance if its security
trades at or above the minimum bid price requirement of $1.00 for at least 10
consecutive trade days within the 90 days period which began on August 14,
1998. If the security does not regain compliance within 90 days, NASDAQ will
issue a delisting letter, which will identify the review procedures available
to the company. The Company may request a review at the time, which will
generally stay delisting, according to NASDAQ.
The Company held a Special Shareholder meeting at the Company's offices at
10850 Wilshire Boulevard, Suite 1000, Los Angeles, California on October 21,
1998, at 10:00 A.M. Pacific Daylight Saving Time. The purpose of the meeting
was the election of four (4) directors to serve on the Board of Directors
until the next annual meeting or until their successors are elected and
quailified. In addition, to approve an amendment to the Company's Articles of
Incorporation to effect a 1 for 3 reverse stock split of the Company's
outstanding common stock. Shareholders of record as of the close of business
on September 16, 1998 were entitled to vote at this special meeting. The
shareholders unanimously approved the 1 for 3 reverse stock split and the
Company's stock began trading on October 26, 1998 under the symbol JTWOD for a
tempory period of 30 days, and then will return to it's original symbol of
JTWO.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in Item 14.
ITEM 9: NONE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth below, as of the date of this filing, lists each
director and executive officer of the Company, the year in which he first
became a director or executive officer, and his principal occupation during
the past five years. Each Director is expected to hold office until the next
annual meeting of stockholders and until his successor has been elected and
qualified.
First
Name and Office to which Elected Age Elected
James P. Jimirro 61 1986
Chairman of the Board of Directors,
President and Chief Executive Officer
James Fellows 63 1986
Director
Bruce P. Vann 42 1986
Director
Rudy R. Patino 50 1997
Chief Financial Officer
Duncan Murray 52 1986
Vice President-Marketing
John De Simio
46 1998
Director
James P. Jimirro has been employed by the Company since its inception. From
1980 to 1985 he was the President of Walt Disney Telecommunications Company,
which included serving as President of Walt Disney Home Video, a producer and
distributor of family home video programming. While in this position, he also
served as Corporate Executive Vice President of Walt Disney Productions. In
addition, from 1983 until 1985, Mr. Jimirro served as the first President of
The Disney Channel, a national pay cable television channel, which Mr. Jimirro
conceived and implemented. Mr. Jimirro continued in a consulting capacity for
the Walt Disney Company through July, 1986. From 1973 to 1980 he served as
Director of International Sales and then as Executive Vice President of the
Walt Disney Educational Media Company, a subsidiary of Walt Disney
Productions. Before his move to Disney, Mr. Jimirro directed international
sales for CBS, Inc. and later, for Viacom International.
James Fellows has been a member of the Board of Directors and the President of
the Central Education Network, Inc., a Chicago, Illinois association of public
television and educational associations, since 1983. From 1962 through 1982,
Mr. Fellows worked in a variety of positions for the National Association of
Educational Broadcasters (NAEB) in Washington, D.C., and became its President
and Chief Executive Officer in 1978. NAEB was a non-profit organization
concerned with educational and public telecommunications. Mr. Fellows is a
director of numerous non-profit corporations including the Educational
Development Center in Boston, Massachusetts, a producer of written and filmed
educational materials; the Maryland Public Broadcasting Foundation, a
corporate fund raiser for public television; and American Children's
Television Festival.
Bruce P. Vann has been a partner in the law firm of Kelly Lytton Mintz & Vann
since December, 1995, and from 1989 through December 1995 was a partner with
the law firm of Keck, Mahin & Cate and Meyer & Vann. In all firms (located in
Los Angeles, California), Mr. Vann has specialized in corporate and securities
matters. Mr. Vann also serves, on a non-exclusive basis, as Senior Vice
President of Largo Entertainment, a subsidiary of The Victor Company of Japan.
Rudy R. Patino joined the company on August 8, 1997 as Chief Financial
Officer. He is a Certified Public Accountant, licensed in the State of
California, and has worked as Chief Financial Officer and Controller for
various entertainment companies over the last 15 years. From 1995 to 1997 he
was Chief Financial Officer for Prism Entertainment Corporation, a producer
and distributor of feature motion pictures. Prior to that, from 1986 to 1995,
he was Vice President/Controller for Avalon Attractions, Inc. one of the
largest live concert promoters in Southern California.
Duncan Murray has been with the Company since August 1986. Before that, he
worked with The Walt Disney Company for fourteen years in a variety of
capacities including Vice President-Sales Administration for The Disney
Channel and Director of Sales for Walt Disney Telecommunications Company.
John De Simio has been in the entertainment side of the public relations
business since 1976. From 1988 to 1996, Mr. De Simio was a Senior Vice
President, Publicity/Promotion for Castle Rock Entertainment, where he oversaw
publicity and national promotional campaigns for their theatrical and
television productions. Before moving to Castle Rock, Mr. De Simio was
National Publicity Director of Twentieth Century Fox Film Corporation from
1985-1988. Mr. De Simio is presently on a disability leave due to a visual
impairment. Mr. De Simio currently serves on the Boards of Theatre LA and The
Broadcast Film Critics Association.
ITEM 11: EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal years
ended July 31, 1998, 1997 and 1996, individual compensation for services to
the Company and its subsidiaries of the Chief Executive Officer (the "Named
Officer").
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($)(4) Bonus ($)(4) ($)(1) ($) SARs (#) ($) ($)
1998 190,750 --- (2) (3) 33,333 - 3
James P. 1997 190,750 --- (2) (3) 33,333 - 3
Jimirro(2) 1996 190,750 --- (2) (3) 33,333 - 3
___________________
(1) Does not include amounts of $12,000 in 1998, $12,500 in 1997, and $9,700 in
1996 paid to Jim Jimirro who is entitled to be reimbursed for expenses
relating to entertainment, travel and living expenses when away from home.
(2) Does not include $6,000 in 1998, $7,000 in 1997 and $8,900 in 1996, which
the Company paid for Mr. Jimirro's health plan. The Company also provides Mr.
Jimirro with a Company-owned vehicle for his use.
(3) Does not include SAR's granted to Mr. Jimirro pursuant to his employment
agreement. See the description of Mr. Jimirro's employment agreement under
"Employment Agreements and Stock Option Plans" below.
(4) Effective June 1, 1992, Mr. Jimirro reduced the amount of salary he receives
to $190,750. Mr. Jimirro does not expect to receive the unpaid portion unless
there is a change in the control of the Company as defined by his employment
agreement. The Company has not accrued any salary or bonus for Mr. Jimirro in
regards to the above for the fiscal years ended July 31, 1998, 1997 and 1996.
Option Grants in Last Fiscal Year
Shown below is information on grants of stock options pursuant to the 1994
Stock Option Plan during the fiscal year ended July 31, 1998, to the Named
Officer which are reflected in the Summary Compensation Table on page 17.
_______________________________________________________________________________
Potential Realized Value at
Assigned Annual Rates of Stock
Price Appreciation
Individual Grants in 1998 for 7 year Option Term
Percentage
of Total
Options/SARs Exercise
Options/ granted to or Base 5% 10%
SARS Employees in Price Per Expiration Stock Dollar Stock Dollar
Name Granted(#) Fiscal Year Share($) Date Price($) Gains($) Price($) Gains($)
James Jimirro 33,333 (1) 52.6 $2.20 (2) 12-28-2004 $3.09 $29,600 $4.32 $70,600
___________________
(1) Options/SARS granted are immediately exercisable.
(2) Options/SARS granted with an exercise price (or initial valuation in
the case of SARs) equal to the closing sale price of the Common Stock as
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") on December 28, 1997, the date of grant for Mr. Jimirro.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Shown below is information with respect to (i) options exercised by the
Named Officer pursuant to the 1994 Plan during fiscal 1998 (of which there
were none); and (ii) unexercised options granted in fiscal 1998 and prior
years under the 1994 Plan to the Named Officer and held by them at July 31,
1998.
Value of
Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARS at
7/31/98 7/31/98(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable(#) Unexercisable($)
James Jimirro -0- -0- 300,000/0 $34,262/0
(1) Based on the closing sale price as quoted on NASDAQ on that date.
Director Compensation
Directors, with the exception of Mr. Jimirro, receive 1,333 stock options per
year exercisable at the then market price as compensation for their services
as a director.
Compensation Committee Interlocks and Insider Participation
The Company does not have a Compensation Committee or similar Board
committee. The compensation of Mr. Jimirro as Chief Executive Officer ("CEO")
is determined under the provisions of Mr. Jimirro's employment agreement with
the Company, which was approved by the Board of Directors in 1994. Jim
Jimirro, James Fellows, Bruce Vann and John De Simio were each directors of
the Company during fiscal 1998.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
In 1994, the Company entered into a new employment agreement with James P.
Jimirro, effective July 1, 1994 (the "1994 Agreement"). Under the 1994
Agreement, which has a term of seven years, Mr. Jimirro will receive a base
salary plus an incentive bonus following the end of each fiscal year during
which Mr. Jimirro is employed by the Company. Mr. Jimirro's base salary for
the first year will be $475,000 and will be adjusted annually by the greater
of (i) 9% or (ii) 5% plus the percentage increase in the CPI Index. Effective
June 1, 1992, the President reduced the amount of salary he receives to
$191,000. The President does not expect to receive the unpaid portion unless
there is a change in the control of the Company as defined by the agreement.
Mr. Jimirro's bonus is to be an amount equal to 5% of the Company's earnings
in excess of $500,000 and up to $1 million; plus 6% of the next $1 million of
earnings; plus 7% of the next $1 million of earnings; plus 8% of the next $2
million of earnings; and plus 9% of the next $2 million of earnings. If
earnings exceed $7 million, then Executive shall, in addition to foregoing
compensation, be entitled to such additional incentive compensation as may be
determined by the Board based upon Executive's services and performance on
behalf of the Company and the profitability of the Company.
The 1994 Agreement also provides that, on the date of each annual meeting of
shareholders during its term, Mr. Jimirro will be granted stock options with
respect to 16,667 shares of Common Stock and stock appreciation rights (SARs)
with respect to 16,667 shares of Common Stock. The exercise price of each
option and the initial valuation of each SAR will be equal to the fair market
value of the Common Stock of the Company at the date of the grant. The
options and SARs will be immediately exercisable non-statutory stock options,
will have a term of seven years, and will be subject to all other terms
identical to those contained in the Company's 1991 Employee Stock Option
Incentive Plan (the "1991 Plan"). The 1991 Plan specifically provides for the
grant of stock options and SARs to Mr. Jimirro in accordance with his
employment agreement. The 1994 Agreement provides that if Mr. Jimirro's
employment is terminated without cause, or is terminated by Mr. Jimirro for
cause or under certain other circumstances, including a change in control of
the Company (as defined below), then Mr. Jimirro generally is entitled to
receive all payments and other benefits which would be due under the 1994
Agreement during its entire term; provided, that such payments would be
reduced to the extent that such payments would constitute an "excess parachute
payment" under the Internal Revenue Code of 1986, or any successor law
applicable to payments of severance compensation to Mr. Jimirro. A "change in
control" would be deemed to occur if (a) any person or group becomes the
direct or indirect owner of securities with 25% or more of the combined voting
power of the Company's then outstanding securities, (b) if there is a
significant change in the composition of the Board of Directors of the
Company, (c) upon the sale of all or substantially all of the assets of the
Company, (d) upon the merger of the Company with any other corporations if the
shareholders of the Company prior to the merger owned less than 75% of the
voting stock of the corporation surviving the merger or (e) in certain other
events. In addition to the foregoing benefits, Mr. Jimirro has the right, if
he terminates his employment under certain circumstances (including following
a change in control or a breach of the 1994 Agreement by the Company) to serve
as a consultant to the Company for a period of five years (the "Consulting
Period"). During the Consulting Period, Mr. Jimirro would be required to
devote no more than 600 hours per year to the affairs of the Company, and
would receive 50% of his salary as in effect on the date of termination of his
employment. As a result of the foregoing, the Company would incur substantial
expenses if Mr. Jimirro terminates his employment with the Company following a
change in control of the Company, which may make the Company a less attractive
acquisition candidate. The 1994 Agreement also provides Mr. Jimirro with
certain registration rights pursuant to which, beginning in 1992, the Company
will be required upon the request of Mr. Jimirro to register the sale of
shares of the Company's Common Stock owned by Mr. Jimirro under the Securities
Act of 1933. The 1994 Agreement is terminable by the Company only "for cause"
as defined therein.
Any employee may participate in any bonus plan which may be established, as
well all Employee Stock Option Plans.
In October of 1995 the Financial Accounting Standards Board issued SFAS No.
123. This statement establishes accounting standards for stock-based employee
compensation plans. This statement will become effective for the consolidated
financial statements in fiscal 1998 and encourages, but does not require, a
fair-value based method of accounting for employee stock options or similar
equity instruments. Management does not believe the impact of the provisions
of the Statement on its assets will be material.
Stock Option Plans
In 1994 the Board of Directors approved an Employee Stock Option Plan and a
Stock Option Plan for Non-Employee Directors. Both Plans were approved by
Shareholders at the Shareholders' Meeting held March 2, 1995.
The Employee Stock Option Plan is to be administered by a Committee consisting
of at least two members of the Board of Directors. All prior options granted
under previous stock option plans are to be replaced by options granted under
the 1994 Plan.
The 1994 Plan provides for a maximum number of options to be granted to be the
greater of 358,333 or 30% of the Company's outstanding shares less 41,667
shares reserved for issuance under the Non-Employee Director Plan.
The term of the options granted shall not exceed 10 years and the exercise
price shall be equal to 100% of the fair market value of the common stock on
the date of grant.
The Non-Employee Directors Stock Option Plan is to be administered by a
Committee consisting of at least two members of the Board of Directors. All
prior options granted under previous stock option plans are to be replaced by
options granted under the 1994 Plan.
The 1994 Plan provided for a maximum number of 41,667 options to be granted
and further provides for the granting of 1,333 option shares per year to each
Non-Employee Director as compensation for his services.
A maximum of 41,667 shares may be issued under the Plan at an exercise price
equal to the fair market value of the stock on the date of grant. All options
are to be immediately exercisable.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the expected beneficial ownership of Common
Stock as of October 23, 1998. The table shows the beneficial ownership to each
person known to J2 who beneficially own more than 5% of the shares of J2
Common Stock, each current director, and all directors and officers as a
group. Except as otherwise indicated, J2 believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Shares Percent
Beneficially of
Owned Class
Number Percent
James P. Jimirro (2)(3) 375,333 26.5%
James Fellows (2)(4) 13,000 (1)
Bruce P. Vann ( 2)(5) 11,333 (1)
All directors and executive
officers as a group
(5 persons) 410,833 29.0%
(1) Less than 1 percent.
(2) The address for each shareholder listed is 10850 Wilshire Boulevard,
Suite 1000, Los Angeles, California 90024.
(3) Includes 166,667 stock options granted under the Company's Stock Option
Plan pursuant to Mr. Jimirro's Executive Employment Agreement.
(4) Includes 13,000 shares of Common Stock purchasable under the Company's
Stock Option Plan.
(5) Includes 11,333 shares of Common Stock purchasable under the Company's
Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bruce P. Vann and the law firms of Kelly Lytton Mintz & Vann LLP, of
which he is a partner, performed services as attorneys for the Company. For
the fiscal year ended July 31, 1998, Kelly & Lytton Mintz & Vann LLP earned
approximately $7,000. Mr. Vann is a director of the Company and, as such, he
(or his law firm) may receive additional compensation for services rendered to
the Company.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this annual report:
1. Financial Statements:
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this annual report.
2. Exhibits:
The exhibits listed below are filed as a part of this annual
report.
2.1 Acquisition Agreement dated as of July 31, 1990 between the
Company, J2 Acquisition Corp., National Lampoon, Inc.,
Daniel L. Grodnik, and Tim Matheson, and related Agreement
and Plan of Merger. (2)
3.1 Restated Articles of Incorporation. (3)
3.2 By-laws of the Company. (3)
3.3 Certificate of amendment to Articles of Incorporation
4.1 Warrant Agreement dated as of October 15, 1990 between the
Company and U.S. Stock of Transfer Corp. (2)
10.1 Amendment to Employment Agreement between the Company and
James P. Jimirro, dated as of May 26, 1988. (3)
10.2 Agreement between National Lampoon, Inc. and New Line Cinema
Corporation, dated as of April 20, 1990. (2)
10.3 Lease between the Company and Pacific Properties. (5)
10.4 Amended lease between the Company and Pacific Properties.
(4)
10.5 Second amended lease between the Company and Pacific
Properties. (1)
10.6 "National Lampoon" License Agreement
Termination between National Lampoon, Inc. and Guber-Peters
Entertainment Company, previously named Barris Industries,
Inc., dated October 1, 1990. (1)
10.7 Showtime Agreement (8)
10.8 Jim Jimirro Employment Agreement (8)
10.9 1994 Stock Option Plan for Employees (9)
10.10 1994 Stock Option Plan for Non-Employee Directors (9)
21.1 List of subsidiaries of Registrant (8)
(1) Filed as exhibit to the Company's Annual Report on Form
10-K for the Fiscal Year ended July 31, 1991.
(2) Filed as an exhibit to Company Registration Statement
on Form S-4, File No. 33-36203
(3) Filed as an exhibit to that certain Form S-1
Registration Statement of the Company as filed with the
Securities and Exchange Commission on July 28, 1986,
September 22, 1986 and October 2, 1986 (The "S-1
Registration Statement").
(4) Filed as an exhibit to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended July 31, 1988.
(5) Filed as an exhibit to the Company's Annual Report of
Form 10-K for the Fiscal Year Ended as of July 31, 1989.
(6) Filed as an exhibit to that certain Registration
Statement of the Company filed with the Securities and
Exchange Commission on May 28, 1993.
(7) Filed as an exhibit to that certain Registration
Statement of the Company on Form S-1 filed with the
Securities and Exchange Commission on October 28, 1993.
(8) Filed as an Exhibit to the Company's Annual Report on
Form 10-K for the Fiscal year Ended July 31, 1995.
(9) Filed as an Exhibit to that certain
Registration Statement of the Company on Form
S-8 filed with the Securities and Exchange Commission on May
8, 1995.
(10)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.
J2 COMMUNICATIONS
October 26, 1998 By:/s/ James P. Jimirro
JAMES P. JIMIRRO
Chairman of the Board,
President, and Chief
Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.
Signatures Title Date
/s/ James P. Jimirro Chairman of the Board, October 26, 1998
JAMES P. JIMIRRO President, Chief Executive
Officer (Principal
Executive Officer)
and Director
/s/ Rudy R. Patino Chief Financial Officer October 26, 1998
RUDY R. PATINO (Principal Financial Officer)
/s/ James Fellows Director October 26, 1998
JAMES FELLOWS
/s/ Bruce P. Vann Director October 26, 1998
BRUCE P. VANN
/s/ John De Simio Director October 26, 1998
JOHN DE SIMI
EXHIBIT 21.1
J2 COMMUNICATIONS
SUBSIDIARIES % OWNED
NATIONAL LAMPOON, INC. 100
NL COMMUNICATIONS, INC. 100
STUDIO 21 PRODUCTIONS, INC. 100
NATIONAL LAMPOON PLAYERS 100
J2 COMMUNICATIONS AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF JULY 31, 1998 AND 1997
TOGETHER WITH AUDITOR'S REPORT
J2 COMMUNICATIONS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
JULY 31, 1998
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
July 31, 1998 and 1997
Consolidated Statements of Operations
for each of the three years in the period ended July 31, 1998
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended July 31, 1998
Consolidated Statements of Cash Flows
for each of the three years in the period ended July 31, 1998
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To J2 Communications:
We have audited the accompanying consolidated balance sheets of J2
Communications and subsidiaries (a California corporation) as of July 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended July 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, a significant
portion of the Company's assets is composed of certain intangible assets.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J2 Communications and
subsidiaries as of July 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
October 9, 1998
Los Angeles, California
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997
ASSETS
1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 879,000 $ 641,000
Short-term investments, at cost 1,352,000 861,000
Other current assets 55,000 75,000
---------- ----------
Total current assets 2,286,000 1,577,000
---------- ----------
NONCURRENT ASSETS:
Intangible assets, less accumulated
amortization of $2,309,000 and
$2,069,000 in 1998 and 1997, respectively 3,656,000 3,896,000
Other noncurrent assets 20,000 -
---------- ----------
Total noncurrent assets 3,676,000 3,896,000
---------- ----------
TOTAL ASSETS $5,962,000 $5,473,000
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES:
Accounts payable $ 154,000 $ 130,000
Accrued expenses 846,000 1,128,000
Deferred revenues 800,000 208,000
Income taxes payable 38,000 38,000
Common stock payable 203,000 203,000
Minority Interest 118,000 84,000
---------- ----------
Total current liabilities 2,159,000 1,791,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized--2,000,000 shares,
none issued and outstanding
in 1998 and 1997 - -
Common stock, no par value:
Authorized--15,000,000 shares,
issued and outstanding--
1,200,000 shares in 1998
and 1997 8,661,000 8,654,000
Note receivable on common stock (128,000) (121,000)
Deficit (4,730,000) (4,851,000)
---------- ----------
Total shareholders' equity 3,803,000 3,682,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,962,000 $5,473,000
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1998
1998 1997 1996
REVENUES:
Movies, television and theatrical $ 622,000 $ 970,000 $ 539,000
Videocassette sales 1,000 219,000 311,000
Royalty income 160,000 111,000 106,000
Publishing - 56,000 8,000
Interest 85,000 59,000 77,000
---------- ---------- ----------
Total revenues 868,000 1,415,000 1,041,000
---------- ---------- ----------
EXPENSES:
Costs of movies and television 26,000 53,000 26,000
Cost of videocassettes sold 5,000 105,000 141,000
Royalty expense 14,000 63,000 37,000
Magazine editorial, production and
Distribution - 41,000 55,000
Selling, general and administrative 765,000 792,000 725,000
Amortization of intangible assets 240,000 240,000 240,000
---------- ---------- ----------
Total expenses 1,050,000 1,294,000 1,224,000
---------- ---------- ----------
OTHER INCOME (EXPENSE) 343,000 - -
---------- ---------- ----------
Income (loss) from
consolidated operations 161,000 121,000 (183,000)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY (34,000) (82,000) (46,000)
---------- ---------- ----------
Income (loss) before
provision for income taxes 127,000 39,000 (229,000)
PROVISION FOR INCOME TAXES 6,000 9,000 7,000
---------- ---------- ----------
NET INCOME (LOSS) $ 121,000 $ 30,000 $ (236,000)
========== ========== ==========
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.10 $ 0.03 $ (0.20)
========== ========== ==========
Diluted $ 0.10 $ 0.02 $ (0.20)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING
Basic 1,200,000 1,200,000 1,200,000
========== ========== ==========
Diluted 1,212,347 1,214,937 1,200,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1998
Notes
Common Stock Receivable
------------------------ on Common
Shares Amount Stock Deficit Total
BALANCES, July 31, 1995 1,200,000 8,643,000 (110,000) (4,645,000) 3,888,000
Accrued interest on notes receivable - 5,000 (5,000) - -
Net loss - - - (236,000) (236,000)
--------- ---------- --------- ----------- -----------
BALANCES, July 31, 1996 1,200,000 8,648,000 (115,000) (4,881,000) 3,652,000
Accrued interest on notes receivable - 6,000 (6,000) - -
Net income - - - 30,000 30,000
--------- ---------- --------- ----------- -----------
BALANCES, July 31, 1997 1,200,000 8,654,000 (121,000) (4,851,000) 3,682,000
Accrued interest on notes receivable - 7,000 (7,000) - -
Net income - - - 121,000 121,000
--------- ---------- --------- ----------- -----------
BALANCES, July 31, 1998 1,200,000 $8,661,000 $(128,000) $(4,730,000) $3,803,000
========= ========== ========= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1998
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 121,000 $ 30,000 $ (236,000)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 240,000 240,000 240,000
Minority interest in income of
Consolidated subsidiary 34,000 82,000 46,000
Changes in assets and liabilities
Accounts payable 24,000 18,000 3,000
Accrued expenses (282,000) (19,000) (33,000)
Accrued income taxes - - 7,000
Deferred revenues 592,000 (5,000) 4,000
Other 20,000 22,000 (61,000)
---------- ---------- ----------
Net cash provided by (used in)
operating activities 749,000 368,000 (30,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (1,641,000) (1,053,000) (1,349,000)
Sale of short-term investments 1,150,000 1,206,000 1,289,000
Distribution to minority shareholders - - (91,000)
Deposit on Equipment (20,000) - -
---------- ---------- ----------
Net cash (used in) provided by
investing activities (511,000) 153,000 (151,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 238,000 521,000 (181,000)
CASH AND CASH EQUIVALENTS,
beginning of year 641,000 120,000 301,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year $ 879,000 $ 641,000 $ 120,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION--
Cash paid during the year for
income taxes $ 6,000 $ 9,000 $ 2,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
1. Summary of Significant Accounting Policies
Organization and Principles of Consolidation
J2 Communications (the "Company"), a California Corporation, was formed
in March, 1986, and was primarily engaged in the acquisition,
development and production of entertainment and special-interest
videocassette programs and the marketing, distribution and licensing of
these programs for retail sale in the home video market. In fiscal
1991, the Company acquired all of the outstanding shares of National
Lampoon Inc. ("NLI"). NLI was incorporated in 1967 and was primarily
engaged in various aspects of the publishing and entertainment
industries. In December, 1992, in consideration for the default of
certain intercompany notes from NLI to the Company, NLI assigned the
rights to the majority of its assets in full satisfaction of the notes.
Included in these assets was NLI's 100 percent ownership interest in NL
Communications, Inc., and Heavy Metal, Inc., which, upon this
assignment, became subsidiaries of the Company.
Currently, the Company is primarily engaged in the licensing of the name
"National Lampoon" in a variety of areas including motion pictures, home
video, television, publishing, and other entertainment media. The
Company's revenues and income have and will continue to fluctuate based
on the size, nature and timing of transactions whereby its names and
trademarks are licensed.
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash Equivalents
Cash equivalents include certificates of deposit with original maturity
dates of three months or less.
Short-Term Investments
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company determines the appropriate
classification of marketable securities at the time of purchase and
reevaluates such designation at each balance sheet date. Marketable
securities have been classified as held-to-maturity and are carried at
cost.
Revenue Recognition
The Company recognizes licensing revenues based upon information
provided by the licensee, with the exception of non-refundable advances
from the licensing of the "National Lampoon" name, which are recognized
when received. Revenues from the sale of videocassettes, net of
estimated provisions for sales returns (which are not material for any
period presented), are recognized when the units are shipped. Advances
for future sales of videocassettes are deferred until the units are
shipped. Publishing revenues include magazine sales and revenue from
advertising included in the magazines. Single copy magazine sales are
recognized as income in the month the issue becomes available for sale
at the newsstand. Subscription revenues are apportioned equally over
the subscription period. Advertising revenues is recognized
concurrently with the recognition of magazine sales.
Intangible Assets
Intangible assets consist primarily of the right to license the
"National Lampoon" name and are being amortized straight-line over a
twenty-five year period. Management continually evaluates whether
events and circumstances have occurred that indicate the remaining
estimated useful life of intangible assets may warrant revision or that
the remaining balance of intangible assets may not be recoverable.
Factors that would indicate the occurrence of such events or
circumstances include current period operating or cash flow losses
combined with a history of operating or cash flow losses, a projection
or forecast that demonstrates continuing losses, or the inability of the
Company to renew, extend or replace existing contracts as they expire,
including licensing of the "National Lampoon" name. When factors
indicate that intangible assets should be evaluated for possible
impairment, the Company uses an estimate of the related business's
undiscounted net income over the remaining life of the intangible assets
in measuring whether the intangible assets are recoverable.
The Company has made a significant investment in the "National Lampoon"
name and other intangible assets through its acquisition of NLI.
Realization of these acquired assets is dependent on the continued
licensing of the "National Lampoon" name for use in feature films,
video, television and audio distribution and merchandising or other
appropriate opportunities. The Company has received approximately
$6,223,000 in licensing revenues since the acquisition of the "National
Lampoon" name in 1990. The Company is in the process of negotiating
other licensing agreements and the development of concepts, programs,
and other opportunities that could generate additional licensing fees in
the future. If these and other licensing agreements that the Company
may enter into in the future do not result in sufficient revenues to
recover these acquired intangible assets over a reasonable period of
time, the Company's future results of operations may be adversely
affected by a write-off of or an adjustment to these acquired intangible
assets.
In evaluating if there has been an impairment in the value of its long-
lived assets, the Company follows the guidelines of SFAS No. 121. This
statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Management has determined
that through the realization of future licensing agreements, expected
future cash flows relating to the intangible asset will result in the
recovery of the carrying amount of such asset.
Per Share Information
The Company has adopted SFAS No. 128, "Earnings Per Share", effective
for the quarter-ended January 31, 1998. All prior period EPS data
presented has been restated to conform with the provisions of this
statement. The adoption of SFAS No. 128 had no impact on diluted
earnings per share for any periods presented.
On October 21, 1998, the Company held a special shareholders meeting
where a 3:1 reverse stock split was voted on and approved. In
consideration of this subsequent event, all periods presented have been
restated to retroactively reflect the decreased number of shares
outstanding.
A summary of the shares used to compute earnings per share is as
follows:
Year-ended Year-ended Year-ended
July 1998 July 1997 July 1996
Weighted average common shares
used to compute basic EPS 1,200,000 1,200,000 1,200,000
Stock Options 12,347 14,937 -
---------- --------- ---------
Weighted average common shares
used to compute diluted EPS 1,212,347 1,214,937 1,200,000
========== ========== ==========
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable
or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Stock-Based Compensation
During 1997, the Company adopted SFAS No. 123. This statement
establishes accounting standards for stock-based employee compensation
plans. This statement encourages, but does not require, a fair-value
based method of accounting for employee stock options or similar equity
instruments. The adoption of the statement did not have a material
effect on the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting policies requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
New Financial Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of An
Enterprise and Related Information" which are effective for the
financial statements for periods beginning after December 15, 1997. The
adoption of these statements will not have a material effect on the
consolidated financial statements.
Reclassifications
Certain items in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 presentation.
2. Short-Term Investments
Short-term investments consist of United States Treasury bills and notes
with original maturities of between three and twelve months. The
following is an analysis of short-term investments:
1998 1997
US Government obligations, cost $1,352,000 $861,000
Gross unrealized holding gains 12,000 26,000
---------- ----------
US Government obligations, fair value $1,364,000 $887,000
========== ==========
No provision has been made for the change in market value for these
investments, as the Company intends to hold them until maturity. In
determining realized net gains, the cost of the securities sold is based on
specific identification.
3. Deferred Revenues
Deferred revenues consist of the following:
1998 1997
Deferred videocassette revenues $ - $126,000
Unearned subscription revenues - 82,000
Deferred television revenues 800,000 -
-------- --------
$800,000 $208,000
======== ========
4. Accrued Expenses
Accrued expenses consist of the following:
1998 1997
Accrued Royalties $ 312,000 $ 499,000
Reserve for contingent payment on
sale of stock 158,000 158,000
Deferred salary 189,000 189,000
Stock appreciation rights 17,000 37,000
Legal expenses and other 170,000 245,000
--------- ---------
$ 846,000 $1,128,000
========= =========
Certain royalties and other expenses accrued in previous years were settled in
fiscal year 1998 at reduced levels. The reduction in these accruals is
reflected in other income (expense) in the accompanying consolidated statement
of operations.
5. Commitments and Contingencies
Made-For-Cable Agreement
In March 1994, the Company signed an agreement with Showtime Networks
Inc. ("Showtime") to produce seven movies over a three year period to be
aired initially on the Showtime Network or The Movie Channel. The
agreement provides for the payment of a license fee to National Lampoon
upon the commencement of principal photography of each film and
contingent compensation based on revenues the films may generate from
all sources. The Showtime agreement has now expired, with only four
made-for-cable movies produced, and as such, the fifth through seventh
movies will not be produced. Showtime has paid the producer fees due for
all movies as of July 31, 1998.
Revenue recognized under this agreement totaled $300,000, $300,000, and
$150,000 for the years ended July 31, 1998, 1997, and 1996,
respectively.
In April 1998, the Company entered into a $800,000 agreement with
International Family Entertainment, Inc. ("IFE"), whereby IFE has
certain exclusive rights to the "National Lampoon" brand (including
name, logos, and related elements), in connection with US television
series and made-for-TV movies during the 1998-99 telecast season. IFE
has the option to extend this agreement for an additional four years,
with an increase of 7-1/2% annually. As the $800,000 annual fee was
received by J2 Communications in June 1998 for the television season
beginning in August 1998, the Company deferred this income until fiscal
year 1999.
Motion Picture Agreement
NLI and New Line Cinema Corporation ("New Line") entered into an
agreement, effective September 11, 1991, regarding the development,
production, financing and distribution of three "National Lampoon"
motion pictures. The agreement provided NLI with a non-refundable
advance of $375,000 upon the execution of the agreement. The agreement
was subsequently amended to extend its term through April 1, 1996.
The compensation to be received by NLI as a result of the use of its
name is $250,000 for each of three motion pictures (payable on
commencement of principal photography of the applicable film) plus
2-1/2 percent of distributors' gross receipts, as defined from all media
in connection with the motion pictures. Revenues recognized under this
agreement totaled $84,000, $118,000 and $166,000 for the years ended
July 31, 1998, 1997 and 1996, respectively.
As of April 1, 1996, New Line had failed to produce the third motion
picture due under the agreement, which was not extended further.
Reserve for Contract Payment on Sale of Stock
The Company has its videocassettes for the domestic market duplicated
primarily by an independent duplication company, Technicolor
Videocassette, Inc. ("Technicolor"), which warehouses the videocassettes
and fulfills and ships orders for the Company. In April 1993, pursuant
to a settlement agreement regarding an outstanding balance, the Company
issued to Technicolor 157,000 shares of its common stock (equivalent to
52,333 shares after the reverse stock split) valued at $176,000, and a
note in the amount of $87,000 to satisfy obligations owed to
Technicolor. The Company paid the balance of the note in full during
fiscal 1995. The agreement provides for an additional cash payment in
the event that such common stock is sold, within a specified time
period, for less than $2 per share (equivalent to $6 after the reverse
split). The Company has recorded a liability, included in accrued
expenses, at July 31, 1998 and 1997, in the amount of $158,000, as a
reserve against such contingent payments.
Joint Venture
As part of the acquisition of NLI, the Company acquired a 75 percent
interest in a joint venture, which only operations consist of revenues
received from the licensing of a certain "National Lampoon" motion
picture. The minority interest's share in the joint venture's revenue
is deducted from movies, television and theatrical revenue. Total
revenues received by the joint venture related to this motion picture
were $124,000, $328,000, and $184,000 for each of the three years in the
period ended July 31, 1998. Of this revenue the minority interest's
share totaled $34,000, $82,000, and $46,000, respectively.
Leases
The Company is obligated under an operating lease expiring on September
30, 2000, for its office facility in Los Angeles, California. The
facility lease includes certain provisions for rent adjustments based
upon changes in the lessor's operating costs and increases in the
Consumer Price Index.
The Company is obligated under an operating lease expiring in September
of 2002 for equipment located at its office facility.
The Company is also obligated under an operating lease expiring in
November of 1999 for an automobile leased on behalf of an employee of
the Company.
The Company is committed to future minimum lease payments for the
following years:
Building Equipment Total
1999 86,000 9,000 94,000
2000 89,000 2,000 91,000
2001 15,000 2,000 17,000
2002 - 2,000 -
-------- ------- --------
Total $190,000 $15,000 $202,000
======== ======= ========
Rent expense totaled $89,000 and $79,000 for the years ended July 31,
1998 and 1997, respectively, and $79,000, net of sublease income of
$5,000 for the year ended July 31, 1996.
Equipment lease expense totaled $2,000, $8,000, and $18,000 for the
years ended July 31, 1998, 1997 and 1996, respectively.
Royalty Agreements
Pursuant to a royalty agreement between NLI and The Harvard Lampoon,
Inc. ("HLI"), NLI is required to pay HLI a royalty of up to 2 percent on
all revenues derived from sales of any magazine or other publication
using the name "Lampoon" as part of its title and a royalty of up to
2 percent of pretax profits, as defined in the agreement, on non-
publishing activities using such name. Royalties payable under this
agreement totaled $13,000, $19,000, and $11,000 for the years ended
July 31, 1998, 1997, and 1996, respectively.
The Company has entered into various royalty agreements with the
producers of videocassettes distributed by the Company. The Company is
required to pay a royalty, according to each individual agreement, of a
percentage of gross receipts, less certain expenses. Royalty expense
under these agreements totaled $2,000, $45,000 and $26,000 for the years
ended July 31, 1998, 1997, and 1996, respectively.
GPEC Agreement
In 1987, NLI sold the exclusive rights to produce television programming
utilizing the name "National Lampoon" to Guber-Peter Entertainment
Company ("GPEC"). In 1991, under agreement with GPEC, NLI reacquired
this right for $1,000,000, of which $500,000 was paid on execution of
the agreement. The remaining $500,000 was payable out of the gross
receipts of television programming, if any. To date, $131,000 has been
paid under the gross receipts provision of the agreement.
Employment Agreement
The Company has entered into an employment agreement dated July 1, 1994,
with its President and Chief Executive Officer. The agreement is for
seven years and provides annual base compensation of $475,000, with
annual increases of the greater of 9 percent or 5 percent plus the
percentage increase in the Consumer Price Index. Previously, the
President had reduced the amount of salary he receives to $191,000. The
President does not expect to receive the difference between the amount
received and the amount provided for under the agreement unless there is
a change in control of the Company, as defined by the agreement.
In addition, an annual bonus is payable to the President if the
Company's pretax income exceeds specified levels. The amount is based
on pretax earnings of the Company ranging from 5 percent to 9 percent
over certain minimums. If earnings exceed $7,000,000, the President
shall be entitled to such incentive compensation, as may be determined
by the Board of Directors based upon the President's service and
performance on behalf of the Company and the profitability of the
Company. A bonus of $100,000 was earned during the year ended July 31,
1995. No bonus was earned in 1998, 1997 or 1996. Deferred bonuses for
the President, included in accrued expenses, totaled $100,000 at July
31, 1998 and 1997. In addition, certain officers have deferred salary
of $89,000 at July 31, 1998 and 1997, also included in accrued expenses.
The Company has also granted the President options to purchase
16,667 shares of its common stock and 16,667 stock appreciation rights
(see Note 7) for each year of his employment contract. The price for
each will be based on the fair value of the stock at the date of
issuance.
Litigation
The Company, NLI and the officers and directors of NLI became the defendants
in a lawsuit in regard to the acquisition of NLI by the Company. The
shareholders of NLI (the "Plaintiffs") filed the claim in respect to the
tax treatment of the transaction to the individual shareholders of NLI.
The Company entered into a settlement agreement in August 1991, which
must still be approved by the courts, under which the Company will issue
an additional 41,667 shares of its common stock to the Plaintiffs and
for the payment of attorneys' fees. The value of the shares to be paid
has been accounted for as a liability of $203,000 at July 31, 1998,
1997, and 1996 as the shares have not been issued and the settlement has
not been approved.
On August 20, 1996, counsel for HLI filed a demand for arbitration with
the American Arbitration Association, asserting that the Company
underpaid royalties payable under the HLI royalty agreement by
approximately $226,000, plus unspecified late charges, for the period
July 1, 1992, through June 30, 1995, based upon HLI's interpretation of
the agreement. By agreement of both parties arbitration has been stayed
and the dispute is currently under mediation. Settlement discussions
are continuing. Management believes that this claim will not have a
material effect on the consolidated financial statements.
6. Notes Receivable on Common Stock
In 1986, the Company issued 800,000 shares of common stock (equivalent
to 266,667 shares after the reverse stock split) to certain of its
officers and directors pursuant to its Restated Stock Purchase Plan.
The shares were issued with 50 percent of the purchase price payable at
the time of issuance and the remainder due in five years. The unpaid
balance is due from the Company's President and Chief Executive Officer
and bears interest at the rate of 10 percent, under promissory notes
secured by the stock in favor of the Company.
7. Stock Options and Stock Appreciation Rights
Stock Option Plans
In March, 1995, shareholders approved the 1994 Employee Stock Option
Plan and the 1994 Option Plan for Non-Employee Directors. These plans
replaced the 1991 Stock Option Plan. All stock options subject to these
plans are granted with an exercise price equivalent to the fair market
value of the common stock at the time of the grant, except that in the
case of the incentive stock options granted to a holder of 10 percent or
more of the outstanding shares of common stock, such exercise price may
not be less than 110 percent of the fair market value and may not be
exercisable after the expiration of five years, versus ten years for
regular stock options.
A summary of the stock options outstanding is below:
Number of Option Weighted Average
Options Price Exercise Price
Outstanding Range Per Share
Balance, July 31, 1995 177,000 $1.68 - $4.44 $3.27
Granted 21,000 $3.24 - $3.57 $3.30
-------- ------------- --------------
Balance, July 31, 1996 198,000 $1.68 - $4.44 $3.30
Granted 38,000 $2.64 - $3.39 $3.00
Canceled (23,000) $3.18 - $3.57 $3.39
-------- ------------- --------------
Balance, July 31, 1997 213,000 $1.68 - $4.44 $3.24
Granted 44,000 $1.68 - $3.00 $2.10
Canceled (8,000) $2.63 - $3.19 $3.09
-------- ------------- --------------
Balance, July 31, 1998 249,000 $1.68 - $4.44 $3.03
======== ============= ==============
Of the options outstanding as of July 31, 1998, 1997, and 1996, 214,000,
192,000, and 188,000, respectively, were exercisable with a weighted average
exercise price of $3.18, $3.27, and $3.30, respectively. The weighted average
remaining contractual life of the options outstanding as of July 31, 1998 was
2.62 years.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" issued October 1995. In accordance
with provisions of SFAS No.123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly,
does not recognize compensation cost. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:
Years ended July 31,
--------------------
1998 1997
Net income (loss)-as reported $121,000 $30,000
Net income-pro-forma $ 76,000 $ 9,000
Basic Earnings (loss) per share
as reported $ 0.10 $ 0.03
Diluted Earnings (loss) per share
as reported $ 0.10 $ 0.02
Basic Earnings per share-pro-forma $ 0.06 $ 0.01
Diluted Earnings per share-pro-forma $ 0.06 $ 0.01
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the resulting pro-forma compensation cost may
not be representative of the cost to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
Expected dividend yield 0.00%
Expected stock price volatility 79.84%
Risk free interest rate 5.83%
Expected life of options 6.89 years
The weighted average fair value of options granted during fiscal 1998
and 1997 is $1.50 and $1.08, respectively.
Warrants
In connection with its acquisition of NLI in 1990, the Company issued
594,333 Series A warrants (including 49,000 warrants issued to certain
creditors). The warrants expired on December 31, 1997.
Stock Appreciation Rights
The President and Chief Executive Officer of the Company has stock
appreciation rights which entitle the officer to receive cash equal to
the difference between the fair market value and the appreciation base
of the rights when they are exercised. As of July 31, 1998 and 1997,
appreciation in these rights amounted to approximately $17,000 and
$37,000. This amount has been included as an accrued liability in the
accompanying consolidated balance sheets.
At July 31, 1998, a total of 133,333 rights were outstanding with
exercise prices of between $1.68 and $4.44 per share.
8. Related Party Transactions
Legal fees of $7,000, $3,000 and $12,000, included in selling, general
and administrative expenses, were incurred during fiscal 1998, 1997 and
1996, respectively, for services from legal firms, one of whose partners
is a director of the Company.
See Note 6 for discussion of a note receivable from the Company's
President and Chief Executive Officer.
9. Income Taxes
The provision for income taxes is comprised as follows:
1998 1997 1996
Current:
State $6,000 $9,000 $7,000
Federal - - -
Adjustment to valuation
allowance:
State - - -
------- ------- -------
$6,000 $9,000 $7,000
======= ======= =======
A reconciliation between the statutory federal rate and the Company's
effective rate follows:
1998 1997 1996
Statutory federal
income tax rate (benefit) 34% 34% (34)%
State income taxes 7 19 3
Benefit of unrecognized prior
year losses (190) (185) 48
Amortization of intangible
assets 64 173 36
Other 92 (22) (50)
------- ------- -------
Effective rate 7% 19% 3%
======= ======= =======
At July 31, 1998, the tax effect of deductible timing differences and
carryforwards is comprised of the following:
Net operating loss carryforwards $507,000
Accrued liabilities and contingencies 136,000
Royalty reserves 131,000
Deferred income 320,000
-----------
1,094,000
Valuation allowance (1,094,000)
-----------
Net deferred tax asset -
===========
At July 31, 1998, the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $1,268,000,
expiring at various dates through 2011.
10. Major Customers
During the year ended July 31, 1998, the Company received $300,000 in
revenues from two motion picture licensees representing 25% of total
revenues. During the year ended July 31, 1997, the Company received
$300,000 in revenues from a motion picture licensee representing 24% of
total revenues. During the year ended July 31, 1996, the Company
received $166,000 and $150,000 from two motion picture licensees
representing 17% and 15% of total revenues.
EXHBIT 3.3
CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
J2 COMMUNICATIONS
The undersigned, James P. Jimirro, the Chairman of the Board, President and
Chief Executive Officer, and Rudy Patino, the Secretary, of J2 Communications,
a corporation duly organized and existing under the laws of the State of
California (the "Company"), do hereby certify:
1. That they are the Chairman of the Board, President and Chief Executive
Officer and Secretary, respectively, of the Company.
2. Article IV of the Company's Restated Articles of Incorporation is
hereby amended to read in its entirety as follows:
"IV. Capital.
(a) The corporation is authorized to issue two (2) classes of shares
designated as "Preferred Stock" and "Common Stock" respectively. The
number of shares of Preferred Stock authorized to be issued is 15 millon
(15,000,000).
(b) Upon a Certificate of Amendment to this Restated Articles of
Incorporation, as amended, becoming effective pusuant to California
General Corporations Law, and without any further action on the part of
the Company General Corporations Law, and without any further action on
the part of the Company or its shareholders, each three (3) shares of
issued and outstanding shares of Common Stock shall be combined into
one (1) outstanding share of Common Stock. Each shareholder who would
otherwise be entitled to receive a fractional share shall receive a
whole share of Common Stock at no additional cost.
3. The foregoing amendment of the articles of incorporation has been duly
approved by the board of directors of the Company.
4. The foregoing amendment of the articles of incorporation has been duly
approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. There are no outstanding shares of
preferred stock. The total number of outstanding shares of Common Stock
of the corporation is 3,599,990. The number of shares voting in favor
of the amendment was 3,038,536 shares, which amount equals or exceeds
the vote required. The percentage vote required was more than
50%.
We further declare under penalty of prejury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our knowledge.
___________________________
JAMES P. JIMIRRO, President
And Chief Executive Officer
Dated: October 21, 1998 ___________________________
RUDY PATINO, Secretary